Jury still out on 408(b)(2) fee disclosure consequences

The July 1 401(k) plan fee disclosure deadline came and went without a splash and industry experts predict that participant disclosures will be even more uneventful.

Plan sponsors are still sorting out the fee disclosure information they received as part of the 408(b)(2) disclosure regulations, said David Wray, president of the Plan Sponsor Council of America. Larger plan sponsors already knew this information, but smaller plan sponsors did not, so they are still sifting through everything they received, he said.

“I think we need to watch and see if there are a lot of RFPs. We anticipated a lot of small companies would shop their plans, but we haven’t gotten evidence of that yet. It’s too quick. Probably later this fall. People have to think about it. It is a big thing to change providers, even for a small company. It’s a big project and a lot of work to make changes on the plan sponsor side,” he said. “Our anticipation is that in the smaller plan world, there will be a number of RFPs that come out of this.”

As far as participant-level disclosures are concerned, most people don’t understand that if they are a small investor or participant in a small plan, they are going to pay retail in the program, Wray said. In a small 401(k) plan, especially one that is just starting up, the fees will be very high because it takes a lot of money to get a plan up and running and there isn’t a whole lot of money in a plan when it first gets launched. Somebody has to pay those startup costs, he said.

Some of the largest plan service providers, like Fidelity, already have issued their participant-level disclosures, and there has been “virtually no reaction,” Wray said. Fidelity’s disclosures went out to 11 million participants and they received about 600 phone calls.

“The benefit of all this is that everything is out in the open. You can get rid of the constant drum beat of administrative abuse,” Wray said. “People have to understand that 401(k) participants are not retail investors. Many people do not get that. This is an employer-directed system. The great advantage of this system is employers direct the system. Participants can go into a program where they are saving and investing in a diversified portfolio, which they would never do on their own.”

He added that most participants will receive their booklets filled with information and educational material and let out a “collective shrug” because they don’t understand it to begin with.

Wray said he has spoken with many participants who have found the provided disclosures very useful and user-friendly.

“It is a positive step, but as far as this generating some kind of reallocation of the system or people calling service centers with questions, that is just not happening,” he said.

Darin Gibson, (left), owner and president of Burnham Gibson Financial Group, Inc., based in Irvine, Calif., said that all of his plan sponsor clients received their 408(b)(2) disclosures on time. He has advised his clients to make sure they are receiving disclosures not just from their plan providers but from their third party administrators and other, smaller service providers. If not, he tells them how to contact those providers with their complaints.

The way the regulations are written “puts the onus on them to get the necessary pieces,” he said.

“I think the industry as a whole did a good job of getting the information out,” he said. Mostly because this topic has been at the forefront of industry discussions and articles since the fee disclosure rules were first proposed a few years ago.

Gibson said that, for the most part, the July 1 deadline came and went and it was a “non-event mostly. “

His company, which employs 25 financial advisors and support staff, didn’t receive any calls from clients regarding the disclosures when they came out. Part of that is because everyone did such a good job of communicating that these disclosures were coming out over the prior six months, he said.

The participant-level disclosures will have the biggest effect on plan sponsors because they will have to distribute information to their participants, Gibson said. Some service providers have put the participant-level disclosures together for their plan sponsor clients, but smaller plans will have to do it themselves. Gibson said he isn’t sure that these smaller plan sponsors know what is required of them for the participant-level fee disclosures.

“When it is business to business, which 408(b)(2) was, everyone wants to be in compliance. Whenever it is left up to the plan sponsor, there are a million other things going on. …They may not be aware of the necessity of distributing the notices,” Gibson said. “Those may potentially fall through the cracks.”

He added that most participants won’t spend much time perusing their fee disclosure information. Some people will ask questions and most providers have beefed up their call centers to handle those calls, but “I would guess that most people are going to round file it.”

If anything, fee disclosure is forcing most plan sponsors to take a hard look at their plans and, if they’ve had any dissatisfaction in the past, these disclosures will spur them to take action, Gibson said. “If they do decide that their platform or advisory relationship is not working for them, it is not that difficult to change.”

The participant-level disclosures that Gibson has seen so far include mutual fund expense breakdowns, asset charges and administrative fees, but there are so many variables depending on what a participant has invested in that it will be up to participants to sift through that information to figure out what they are paying in fees, he said. The notifications aren’t necessarily going to tell a person, “you paid $2,300 in plan fees last year,” he said. “It goes a step further than what they had, but it won’t give complete clarity on what they are paying.”

As a whole, the industry has become more transparent in the past 15 years and Gibson believes that trend will continue.